President Mohamed Morsi's adviser for foreign policy asserts that Egyptian pound will not collapse as some speculate

The Egyptian pound will not collapse and its incremental depreciation has stabilised, a senior aide to Islamist President Mohamed Mursi said on Sunday.

Essam Haddad, Mursi's deputy chief of staff and foreign policy adviser, told Reuters in an interview that he did not expect the pound to fall further after it lost more than 8 percent against the dollar since the start of the year.

"I think it has reached a level of stability," he said.

"So as long as it (depreciation) is going incrementally and in a way that is market-sensitive, then there is no harm in this," Haddad said.

More than two years of political instability following the overthrow of President Hosni Mubarak in 2011 has triggered a flight into dollars. The Egyptian pound has faced extra pressure since late last year, when violent protests against President Mohamed Mursi erupted, setting back hopes for economic recovery.

Violence flared again in Egypt on Sunday, with thousands blocking access to the harbour in Port Said to demand justice over the deaths of dozens of people in riots last month.

That violence was triggered by anger over the death sentences handed down to 21 people from Port Said for their involvement in a soccer stadium disaster in the city a year ago.

Presidential adviser Haddad said of the Egyptian currency: "What we have to be very careful of is to (avoid) a drastic change, or a complete fall or collapse. And this is something we are not seeing in the foreseeable future and we hope that it will recover."

Black market

A black market in hard currency has sprung up in recent weeks due to a shortage of dollars, with street traders quoting the pound at more than 7 to the dollar compared to an official rate of 6.73.

Regulated foreign exchange bureaux are swamped by demand for dollars and cannot meet the demand, the head of the foreign exchange department at the Chambers of Commerce said.

A senior business leader affiliated with the ruling Muslim Brotherhood, Hassan Malek, told Reuters in an interview that people expected further devaluation of the pound.

"I'm not, of course, a technical (expert) but people expect a little bit of devaluation in the future," he said when asked whether he expected a further depreciation of the currency to help exports and tourism.

He said the economy was going through a very difficult period because the transition to democracy launched by the 2011 uprising that toppled former President Hosni Mubarak was not yet complete and institutions were not working fully.

Asked about such concerns, Haddad said: "When the situation starts to stabilise more on the political side, I believe the Egyptian pound will be even stronger."

There had been calls from the business community to change the exchange rate to boost the economy by improving exports and making Egypt more attractive for foreign investors, and those changes had now occurred, he said.

"Market forces will act on this and decide what is the best value for the Egyptian pound," Haddad added.

Egypt's central bank governor said late on Sunday he had no fears of dollarisation and added the bank had reduced the amounts offered at its U.S. dollar auctions in order to set aside hard currency for imports of crucial goods.

Foreign investors are eyeing Egyptian households' dollar holdings as a critical gauge of trust in the authorities. Investors are watching closely for evidence of a significant rise in ordinary Egyptians' dollar holdings.

"I am not worried about dollarisation," Hisham Ramez said in an interview with CBC channel late on Sunday. "Household dollarisation is at far lower rates than those that would scare one," he said.

In an attempt to control the rate of the pound's decline, Egypt's central bank introduced regular dollar auctions in December. Having initially offered sums of $75 million per auction, the bank has reduced the amounts sold. Last week it offered $40 million at each of its dollar sales.

Reserves have fallen to $13.6 billion, less than the $15 billion needed to cover three months worth of imports.

"Of course it's not something good, not something comfortable," Ramez said, adding he had taken steps to counter this such as prioritizing certain imports including foodstuffs, production machines and their spare parts, and fertilizers.

He said speeding up measures to secure a $4.8 billion IMF loan Egypt has requested would help the reserves recover.

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